Commissions Part 1 - Introduction

Part 1: Introduction

Recently a major class-action lawsuit was resolved in Missouri that will impact real estate nationwide. The news response was predictably overreaching and dramatic. You may have read headlines like: 

• “The 6% Commission Is Gone”
• “How The Recent Realtor Settlement Could Change The Way Americans Buy And Sell Homes”
• “Real Estate Commissions Are Being Slashed!”
• “First-Time Homebuyers Could Face Thousands Of New Costs Following NAR Settlement” 

First question, how does this impact me? Remember this, Buyers want to find a home to live in that they can afford, and Sellers want to sell their home and net the most possible and on a timeline that meets their needs. This article will cut through the noise and identify what has and has not changed and how it could impact you in the housing market. 

Summary of the Court Case

Motivated by rising housing prices, a lawsuit brought by Sitzer/Burnett sued The National Association of Realtors (NAR) and other large real estate companies for antitrust violations.  This case revolved around allegations that NAR and major brokerages conspired to keep real estate commission rates artificially high, leading to inflated costs for home sellers. The plaintiffs argued that NAR's policies, including the Clear Cooperation Policy, contributed to this issue by mandating listing brokers to offer compensation to buyers' agents. 

The remedy involves a fine to NAR and other large real estate companies. Then a practical implication requires all MLSs (Multiple Listing Service) to no longer have any hint of providing any compensation for a listing. It also requires that buyer agents obtain a written agreement with potential buyers with which they work.. 

The Impact in Colorado

Because Colorado for years (as long as any of us have been in business 20+ years) requires a buyer’s agreement and because our contracts have specific verbiage delineating the compensation the seller will offer a buyer’s agent, in some regards, there is little being changed. 

It will be new that the MLS can no longer promote compensation for a listing. So, brokers and their brokerages will promote this information on their websites, through email blasts, and flyers promoting the home. 

Our Colorado buyer agreements allow agents to represent their buyers in different ways. Without going too far into the weeds, we can represent the buyer requiring us to have a fiduciary relationship or not. For the agents, it will be more important than ever to ensure that they represent their buyers in a fiduciary relationship and have a predetermined agreement on compensation. Since commissions are included in the sales price of a home, it makes little to no sense for a seller to not include an offer of compensation (more later). 

The National Association of Realtors (NAR) will most likely remove a clause in their Code of Ethics stating that Realtors can’t negotiate their commission. This was a systemic contradiction here in Colorado as we are a state where real estate agents can have a ‘fiduciary’ relationship with their clients (depending on the type of representation agreed upon) which may involve the agent negotiating their commission with the seller in the best financial interest of their buyer. But to do so violated the ethical statement, but not the law. 

Impact on Home Prices

This may shock you, but I believe the court got this wrong. Yes, I’m biased but the recent explosion in prices and costs to the buyer isn’t because of a real estate commission which has been at least 5% since the 1940’s. There were two overarching factors. First, the Fed letting the rates get too low (yes, mortgage rates are based on bonds, but it is tied fairly closely to the Fed rate). When rates were sub 3% then it was like free money available and many buyers understood this. This created bidding wars for homes leading to homes selling for $30,000, $50,000, and even $200,000 more than list price.  If rates were between 4 and 6% this would not have happened. The other factor was the new influx of companies buying single-family homes. Businesses and investment funds (i.e. BlackRock) realized this money was cheap and so they aggressively entered the market. In dozens of states, corporate ownership (mostly in starter or good renting homes) rose on average from 25% to 33%. These two factors have caused home values to increase 25% to 30% in three years. These are the biggest game-changers on the price of a home! 

For Sellers, in particular, the price of a home includes the commissions. If you drop commissions by any percentage, then technically that home is devalued by the same percentage. Most buyers are aware of this and will discount their offer accordingly. When buying a FSBO (For Sale by Owner)  you discount it by roughly 3% since an agent does not represent them. This becomes a net zero impact on the bottom line for the seller. 

Part 2 will dive into the impact on Sellers and Part 3 will focus on buyers. Both are important to understand regardless of which side of the aisle you currently stand.